Franchise System Documentation

Franchise Disclosure Document (“FDD”)

Franchising is a long term business relationship regulated by both federal and state law. Prior to selling a franchise opportunity, franchisors are obliged to disclose information about the company, fees, required legal documents and what the franchise system will offer. It is very important that this information is provided in order for franchisee candidates to make an informed decision. The “14-Day” rule applies to the receipt of this document. Essentially, candidates must wait at least 14 days before signing a franchise agreement. As a potential franchisee, it is very important that you read this document and seek clarification for anything that you do not understand.

Careful consideration is taken in the drafting of this document. Important information about the franchisor is addressed: names of the parties running the system; business experience; past litigation; prior bankruptcies; initial franchise fees; other fees; estimated initial investment; any restrictions on products, services or sales; franchisee’s obligations; any available direct or indirect franchisor financing; franchisor assistance on advertising, computer systems and training; territory terms; intellectual property; any obligation for the franchisee to participate in the direct operation of the business, contract terms- renewal, termination, transfer and dispute resolution; important provisions in the franchise agreement and related documents; any fees paid to public figures; financial performance; existing locations and/or franchisees; and a copy of all contracts a franchisee will be required to sign.

This document serves as the foundation for franchisee candidates to carefully evaluate whether a particular system is the right one for them to invest money, time and effort.

Franchise Agreement

A franchise system may have a mix of single-unit or multi-unit franchisees. A franchise agreement is required for each location that a franchisee develops- whether it is the first or tenth one. This document lays out the terms and conditions between the franchisee and franchisor as is it relates to the use of trademark and products; fees, ongoing royalties and advertising fees; territory- exclusivity; business operating standards- procedures, training, termination/transfer rights/renewal, etc. An initial franchise fee is required; it is an additional fee to the fee required under a multi-unit development agreement (See “Store Development Agreements: Multi-Unit Development). The ultimate goal with this document is to strike the delicate balance between remaining flexible to market changes yet serve as a solid foundation to maintain brand standard consistency across the system.

In addition to fees set forth in the franchise agreement, start-up costs also should be taken into account such as: real estate obligations, design and construction, professional services fees, equipment, fixtures, furniture, opening inventory, supplies, insurance, pre-opening labor, advertising, promotion, grand opening and working capital for labor, insurance, utilities, advertising rent, financing. etc.

Store Development Agreement: Multi-Unit Development

A Store Development Agreement can be one of the most powerful documents for both the franchisee and franchisor. It comes into play when the franchisee is ready- financially and operationally- to develop multiple locations for the brand. Two primary types of arrangements can exist:

(1) Sub-franchisor (responsible for franchisee recruitment, sales and supporting franchisees in their territory) and

(2) Area Developer (directly responsible for opening a specific amount of locations on a specific schedule in their territory).

The Store Development Agreement gives a franchisee the right to develop a specific number of locations, over a specific period of time, in a defined area. In exchange for this right, the franchisee agrees to pay a Development Fee. As each location is approved for development, a franchise agreement is executed; a pro-rata portion of the Development Fee is then applied towards this location. The Development Fee is separate from the Franchise Fee. Many benefits exist for both the franchisee and franchisor in multi-unit development:

  1. The franchisee has an opportunity to spread financial risk across multiple locations to help manage cost and mitigate the impact of any locations experiencing a slow revenue period
  2. Exclusive territories offer franchisees a stronger framework to help drive strong decision-making on site locations- the pressure of competing with someone else from the same system does not exist. Franchisees are able to develop strategically and be more mindful on how to expand their business.
  3. From a training standpoint, a franchisee can leverage high performers to help build additional high performing teams across locations as well as assist the brand with ongoing refinement of brand training techniques.
  4. Additional locations also help create advancement opportunities for ambitious employees that will outgrow their starting positions with the franchisee business owner.
  5. Marketing dollars have a stronger impact because they are divided across multiple locations and, most importantly, help build long term brand equity to fuel more growth.
  6. Developing more than one location helps build confidence in the development process, which then enables the franchisee to maximize both his/her business potential as well as successfully expand the brand.

Market planning can be a competitive tool in building a superior store development agreement. Market analysis helps shape a more strategic development opportunity; it helps mitigate “guesswork” risk as to where, how many and within what period of time. Even after a territory is defined and sold, a franchisee can continue to leverage market planning by using it to drill down to the next level within their exclusive area, for instance, ranking the trade areas with the highest likelihood of success to focus on first.

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